02 October 2013

Institutions, plural

These comments (from a mailing list) are insightful [Some links are subscriber only]:

BR asked:

First of all I would like to say that I am here following North (1990) to define institution. Professor Gerald Roland of UC Berkeley introduced the concept of slow-moving and fast-moving institutions to understand the institutional change (See Roland (2004) and other related articles). Political institution belongs to fast-moving institution while social norms can be good examples of slow-moving institution. Slow-moving institutions change gradually and give the shape of fast-moving institutions according to him. He draws numerous examples to establish his propositions that importing institutions from one country or setup and making them work in another setup (may be on similar ground such as CPR [Common Pool Resources] management in both the setup) may actually lead to collapse of the institution in the latter. The reason may be that such transplantation or importing may harm the congruence between slow-moving and fast moving institutions. This congruence is required for (transaction)cost effective development. His arguments have some historical background also.

Based on this perspective, I was wondering whether we can identify any case study/work dealing with CPRs where such transplantation and importing have been done and whether we can reinterpret the reasons for why institutions decline in CPR Management. I know and read one such article of institutional misfit by Katrina Brown where she shows how institutional misfit leads to high cost of CPR conservation.

My hypothesis in this context is that in the case of long-enduring institutions such as Spanish irrigation system, slow-moving and fast-moving institutions are complementary and in case of the failed CPR management such institutions were either transplanted from elsewhere or lack both complementarity ans substitutability. The issue has also some historical relevance I think.Robinson's paper (robinson et al., 2013, World development) appear to help me in this regard. Can any of you suggest me in this regard with reference/work/advice?

RM replied:

Probably the best single piece on this topic was Ostrom’s “Going Beyond Panaceas” [pdf], part of a special issue she edited in PNAS that introduced her SES framework, that had broad categories of factors that affect institutional performance; each of those can then be considered at deeper levels. This deals with the problems of “transplanting” institutions.

JA added:

Right, there are no panaceas for environmental problems. However, some form of institutional instruments leading to cooperation seems unavoidable, and pure economic instruments cannot do the job for CPR. That is more easily said than done, though. I am thinking on water pricing and water markets to manage water resources such as aquifers (where the problem in India is quite serious). Economic instruments have been basically chosen in the European Union and Australia to solve water management problems.

You may take a look at the results of both types of instruments in this piece comparing economic instruments (Western La Mancha aquifer), and institutional instruments (Eastern La Mancha aquifer).

JR elaborated:

I suppose the economic translation of "no panaceas" is:

No institution is capable of achieving a first best solution. This is true for private goods as well as for natural resources such as forests, fish, water, and grazing land.

No institution is second-best in all conceivable circumstances.

The challenge is to devise a framework that is capable of determining which institution is welfare-maximizing under specific assumptions. Various articles with circles, squares, and arrows showing possible interactions and tables showing the conditions favorable to one institution or another are useful, but I suspect that their authors realize that a more complete theory lies ahead. The best article I can think of on comparative analysis institutional analysis for the management of renewable resources is Copeland and Taylor's AER piece on "Hardin," " Demsetz," and "Ostrom" institutions. That piece provides a mapping from resource and transaction-cost characteristics to the second-best institution that prevails in the steady state. The remaining challenge is to develop a similar theory that does comparative institutional analysis for a natural resource at various levels of scarcity. Under what conditions, for example, might a resource be optimally managed first by no property, then by common property, and finally by private property as the resource is depleted, possibly to a sustainable steady state?

But JW disagreed a little:

I’m not sure the 'no panaceas' idea translates into economics the way economics is usually done. Ostrom’s point about no panaceas was that in complex systems mean field theories tend to give very poor policy guidance - logical but poor. Getting the incentives right requires careful attention to the particular circumstances of the local and broader social and ecological environment. For example, property rights can provide strong incentives to conserve, but when the circumstances of the environment and/or the way the rights are designed does not provide adequate feedback about the outcome of the person’s actions, there is little an individual can learn about how to further her/his self-interest through conservation; this leaves the property right of little or even perverse value for conservation. This is equally true of collective/community rights, even if the social circumstances might otherwise be favorable for effective collective action. The bottom-line is that institutional design has to be tailored to the often very particularistic circumstances of a time and place.

If she were around Ostrom might be tempted to paraphrase the old joke about Milton Friedman who, when asked what he would say if the real world did not conform to his (mean field) theory, replied ‘so much the worse for the real world’.. or something to that effect.

To which, JR replied:

In her "Beyond Panaceas" paper, Lin Ostrom and co-authors noted: "In the context of governance of human–environment interactions, a panacea refers to a blueprint for a single type of governance system (e.g., government ownership, privatization, community property) that is applied to all environmental problems." Copeland and Taylor went further by providing conditions under which a resource is optimally governed (in the steady state) by three institutions (in their case open access, privatization, and community property).

Field theory, mean or not, is beyond my pay grade, but even Georgescu-Roegan said that "abstraction is the highest ladder of any science," and different levels are appropriate for different problems. I like to think that Lin would take pleasure in knowing that her diversity of institutions message was carried on by a diversity of models.